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How many currencies is the right number, and what happens to the losers?

Future banking

By Simon Raymer, CIO, Fraedom

15 Nov 2017

In the world of cryptocurrencies there are more contenders than Bitcoin. But no matter what currency you back, you need to have the right tools to manage your transactions.

The news has not been good, of late, for cryptocurrencies. As the Chinese government gets tough on Bitcoin houses, and Etherium depositors are busy checking to see if they are one of the people who have lost – forever – anything up to $300m, newcomers could be forgiven for pausing and re-evaluating their decision.

There are at least 700 other crypto-currencies to choose from. Of that 700, there are perhaps six major players that are showing signs of moving out of the niches that produced them.

What does this massive expansion mean for banks? And how do you know which of these horses to back? It’s clear that Bitcoin’s murky genesis and risky growth has not helped to avoid attacks, even from the tribes who stand to gain the most from its expansion. And that phase is not over yet. The Government of the People’s Republic of China is a worthy adversary for a regular currency, never mind one that is only knitted together from megawatts.

Staying liquidIt’s the banker’s term liquidity that really should grab people and have a bit more punch to it – perhaps something more threatening and up-front like “drop-dead value” might get the idea across with the right level of impetus. Liquidity is a measure of how easily any broker – traditional or Bitcoin-era – can withstand all their customers turning up and asking for all their money, at once.

It does still happen, sometimes. If it does, the broker must either trigger some very large short-term loans from their friends or insurers, or they just run out of money and have to turn people away with nothing. This is what has happened in the Etherium depository crash.

Real, official banks are meant to have protection against this happening, as are the individual depositors themselves. In the UK deposits are guaranteed by the government, up to a ceiling of £85,000, with other European countries protecting up to €100,000 per person. This kind of protection is notably missing from almost all cryptocurrencies. Track records of compensated users are very thin on the ground.

This may well be because the notion of using any cryptocurrency as a savings plan is risky. The main reason regulators don’t like cryptocurrencies is that they facilitate fast moving transactions: money is converted to cryptocoin, changes hands, and then is converted to another at the speed of the internet. The degree of security, fair value assessment and user monitoring required by these speedy users is a different world from that required to be a safe haven for long term deposits.

The most useful cryptocurrencies are the ones that favor the depositor over the passing trade. To do that, they must be unusually transparent, making it perfectly clear who did what, when.

Need for accurate reportingThis is where the reporting system, the part that lets you know your transfer is complete, your payment is due, or that someone tried to log in with your credentials from a new device, becomes almost the most important part of the system as a demonstration of long-term commitment. Without much more advanced and flexible reporting, the increasing speed of online exchange – started by, but by no means limited to the new currencies – will rapidly outstrip a manager’s ability to honestly say they know what is going on.

If you are seeing a great spread of new currency temptations, then managing the speed becomes the most important part of your selection process. Can you see not just one person’s balance within your company user base, but the overall position, and receive alerts at any time no matter where they, or you, are located? Any obstruction to oversight is grounds to move on to the next candidate for your people, their money, and your business.

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